TO ANALYZE THE IMPACT OF QUANTITATIVE EASING

Indonesia’s economic growth projection 2013 of 5.8%-6.2% as economic concensus should serve as a point of departure for the Government to scheme up an economic development concept for the future. The year 2014 would mark the nation’s journey. If the Government failed to set up a proper economic growth concept, it was almost certain economic growth percentage would shrink.

           

Pursuant to that matter, the Government had planned to prepare a broader fiscal scope for 2014 compared to 2013. In that case, such a measure demanded higher tax income amidst uncertain global economic condition. This fiscal space was possible to consider that the energy subsidy burden [oil fuel] has been reduced as the Government reduced price of subsidized oil on June 22 last.

           

The fiscal space was the Government’s available stock of money whereby to finance all plans’ execution, usually for infra-structure. So far the fiscal space of APBN state budget had always been on the shortage due to high expenditure for burreraucracy, including civil servant’s salary of office operational expenses, payment debt’s interest and oil subsidy.

Quantitative Easing would be needed when national economy was under pressure, by internal factor external factor. Apparently the external factor was more prevalent than the internal factor. Hence it seemed right if the Government proclaimed at early stage to enhance better economic growth next year.

Apparently some countries had been successful in running similar programs. Japan for example constantly enhanced monetary easing, not the fiscal. As known, Bank of Japan [BoJ] on October 2012 last launched USD 138 billion in their new monetary easing to spur on slow growing economy, pursuant to same measures taken by America and Europe.

BoJ stated they would expand the program of buying assets their main policy instrument amounting to 11 trillion Yen [USD 138 billion to become 91 trillion yen while simultaneously keeping interest rate to remain at 0 to 0.1%.

BoJ had been under the pressure of politicians who urged them to take sound measures as more data showed the post-disaster recovery plan slowed down due to world’s adverse economic condition, while strong Yen reduced demand for Japanese product abroad.

With ultra-low interest rate, BoJ had expanded their asset buying program by procuring liquidity to the market as bank were buying Government’s and corporate bonds and promissory notes. BoJ was rated as doing the right thing in exercising monetary easing aggressively to keep Japan’s economy from going off-track and return to sustainable growth process with stable prices.

Japan’s success under the leadership of Prime Minister Shinzo Abe in running the monetary easing policy was rated as being successful in jacking up profit making by various companies in Japan. Such was because just like America Japan was exercising monetary easing by printing more banknotes in the hope to weaken Yen’s exchange rate value so as to increase income from export.

             

As know, BoJ underscored their plan to multiply the monetary base for the next 2 years. Meanwhile the Fed had also been maintaining their quantitative easing program to enhance economic growth.

Unlike monetary easing exercised by Japan and the USA, a different recipe was written by Uni Europe, especially based on the “directives” of Germany that is was because an easier fiscal policy tends to pile up more debt. So far many European countries were debt-ridden to the amount of close to or even more than GDP of each respective country.

In case of the USA, policy makers had to work extra had to crack problems. The USA as the world’s locomotive of economy was having worsening condition time after time. Government of the fed Ben Bernanke who signaled execution of Quantitative Easing Part 3 by saying that the labor market in USA was stagnant was “the main anxiety” although the action was not predictable for the near future.

The crisis that hampered some the word’s leading economy was getting more and more disheartening, forcing al stakeholders to take serious measure to calm economic turbulence. Statement of The Fed’s Government Ben Bernanke finally breezed out hope for market players that Quantitative Easing would still be continue for a while.

Bernanke stated that the Central Bank Would probably review QE by end of year and end the program by mid-2014. However Bernanke also stressed that buying of asset by the Fed depended on economic and financial climate.

Furthermore he remarked that buying of assets could be maintained conditionally. i.e. if inflation was to low or the labor market tuning worse or if the financial condition was “less accommodative” to The fed’s action to stop QE.

Meanwhile to enhance economic growth, the Fed still maintain short term credit interest close to zero for a notably long time as the program of bon buying ended. Bernanke arrived at a conclusion that it was important to announce the Central Bank’s plan to the market, and Bernanke saw that the market was beginning to understand bank’s message so volatility was cooling down.

Europe was now having torrential crisis, nearly all countries of The Euro Zone were hampered without exception. From Greece to Spain and Italy as the second and third economy of Europe were rolling down over hill. This forced ECB to work extra hard to troubleshoot problems is Europe. In September 2012 last ECB had announced buying of Italian and Spanish in the open market to stabilize bank interest level in the Euro Zona.

Governor of ECB Mario Draghi promised to safeguard by all means. This statement was welcomed by financial market players who were waiting for ECB’s action to overcome crisis in Euro. Draghi stated that the Board of Governors of ECB had considered to exercise unusual monetary policy.

             

The QE policy in the USA and Europe could server as reference to the Government of RI in adopting QE. Indonesia was not as severely troubled economically as European states but in case of fiscal, Indonesia was known to bear the burden of oil subsidy which burdened the state budget.

           

Even the rating of standard & Poor’s rating agency’s decision to downgrade Indonesia’s rating to stable due to weakness in fiscal policy was because they saw that the Indonesian Government was unable to run the right policy in regard to price of subsidized oil which endanger fiscal health as a whole; so the management of this budget bettered terms of accountability.

It seemed right that President SBY asked all parties to understand the condition of fiscal and APBN state budget, so they could share the same perception by the time the policy of fiscal reformation was put in effect. At the convention of National Development Plan in Jakarta on April 30, 2013 last, the Head of State Budget, the condition of Fiscal and APBN State Budget muat be seriously observed.

The president also stated that the budget burden, especially oil subsidy had the potential to endanger the state of fiscal. In the state Budget of 2013, revenues of Rp1,529.7 trillion against state expenditure or Rp1,683 trillion the deficit was Rp153.3 trillion or 1.65% of national GDP.

According to President SBY, huge subsidy reduced potion of budget for people’s welfare so poverty elimination would be lessened while infra structure development was limited. Therefore the President has asked Finance Minister Chatib Basri to keep fiscal and APBN to remain healthy. To protect fiscal resilience with prudence was an important thing as anchor of all policies in finance.

Finance Minister Chatib had specified how wide was the space for fiscal in RAPBN State Budget 2014. This would at least be seen in the introductory Speech for APBN Bill 2014 including Financial Report by President SBY on August 16, 2013 at the Plenary Meeting of House.

To illustrate, additional fiscal space obtained from subsidized oil per June 22 2013 in APBN-P State Budget 2013 come to Rp18.4 Trillion Rp13 trillion of which was allocated for infra-structure building. The rest was allocated for public transportation, energy conservation, and social safety net plan like health budget.

Deficit of RAPBN State Budget was targeted at 1.49% o GDP or equal to Rp154 trillion. State’s revenue was estimated at round Rp1,700 trillion and state expenditure  around Rp1,800 trillion. For comparison, deficit of APBN-P 2013 was 2.38% or Rp224.2 trillion. State’s revenue budget was Rp1,502 trillion and state’s Expenditure budget was Rp1,726 trillion.

It was noteworthy that the Government planned to axe budget expenditure which were not too indispensable like official trips and buying of goods which were not directly related to capital expenditure. The Government was also preparing some fiscal incentives to maintain economic growth at around 6%. The fiscal instrument was expected to jack up domestic economy especially in public consumption which was still sustainer of national economy growth.

The Government’s decision to procure fiscal incentive was on account of slow export growth and foreign investment and under-utilized Government’s budget. The incentives were expected to substitute the role of sectors having downturn whereby to feel secure at 6% level. The fiscal incentive came in # options i.e. tax suspension or companies relying on labor intensive projects, tax discount and increasing the ceiling of non-taxable income [PTKP]. The option would be chosen after considering some indicators among others economic growth attainment in August post-inflation era 2013.

The fiscal instruments were applicable in the event that economic growth actually slowed down by year end, or inflation actually soared up higher than Government’s target and suppressed people’s purchasing power. Suspension of company’s tax would soon be applied on labor-intensive companies, on condition that the companies were not allowed to dismiss employees. Thereby it would maintain workers purchasing power and domestic demand could be enhanced to ensure economic growth.

The measures to be taken by the Government today had been successfully exercised in 2008. At that time the fiscal incentives given was income Tax Bracket [Pph] being reduced, so people’s consumption and purchasing power again rose to support economic growth. One thing was sure the policy had definite objectives i.e. economic growth, create employment opportunities and eliminate poverty.

Pursuant to fiscal easing to be exercised next year, there were at least four steps to be exercised by the Government to make APBN State Budget a stimulus of economic growth.

Firstly, to enhance self discipline in realizing budget absorption of APBN State Budget.

Secondly, to maximize state income from tax as well as from non tax resources [PNBP].

Thirdly, to re-structure allocations in APBN State Budget by prioritizing capital expenditure. Such was necessary to be done as capital expenditure was a great stimulus factor of economic growth.

Fourthly, to allocate APBN Sate Budget on sectors with high absorption capacity of workers, for example agriculture and labor intensive industry.

The only thing was that fiscal easing deigned to enhance infra-structure development would be more fruitful if accompanied by the right monetary policy. In this case BI rated that monetary instrument needed to be expanded to create long term resources for financing infra-structure development, not just Promissory Notes.

Monetary instrument could also be based on bonds released by BUMN or corporate qualified as bonds of high quality. Release of Government’s Promissory Notes could deepen penetration into the bond market as well as invigorating asset structure of the Central Bank.

 

 

Business News - August 21, 2013